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Monster.com and HotJobs: Fine Young Cannibals?

Consolidation never hurt in the Internet industry, but TMP Worldwide (TMPW) shareholders still don't have a clear idea of how it will help.

The operator of Monster.com, the largest employment site on the Internet, told analysts Monday morning that the rival it is acquiring, HotJobs.com (HOTJ), would enable TMP to rule the online jobs category with a two-brand strategy. But executives at the acquisition-hungry TMP also said they hadn't quite figured out how they would keep the two brands from blurring into one another.

The answer is a crucial one, because investors are betting that the richly valued TMP will one day become a cash cow in the online job-hunting market, which is nibbling away at traditional markets like newspaper employment classifieds. Yet because there's plenty of overlap of visitors to Monster.com and HotJobs.com, and a weak economy tempts employers to use one online site, TMP has to find a way for each brand's growth not to come at the expense of the other's. Both sites make money mostly from the fees they charge for running employer ads or offering access to resume databases.

Encouraging

It's encouraging that TMP will become virtually the only choice for employers who seek to recruit on the Internet, Robertson Stephens analyst Brian Shipman wrote in a report issued early Monday. But, he wrote, "In the midst of a tough economic environment, we think employers (advertisers) are more likely to narrow their choice of recruitment advertising vehicles to one site rather than continue advertising on both." (Shipman has a buy rating on TMP; his firm hasn't done underwriting for the company.)

On Monday, TMP closed at $58.52, down $1.48. HotJobs.com rose $3.49 to $12.49. Under the transaction, expected to be accounted for as a pooling of interests, HotJobs shareholders will receive about 0.22 TMP share for each of their shares, a transaction valued at more than $485 million at Monday's close.

The deal's success will hinge on TMP's ability to segment the market into different brands, along the lines of how AOL Time Warner (AOL) goes after different parts of the online market with its America Online, CompuServe and ICQ brands, says Kelly Flynn, human capital management analyst at UBS Warburg. She says she believes this will be possible, but as it stands now, there's no differentiation between the sites other than that some people go to one and others go to the other. "They will probably need to differentiate more to have the strategy be effective," she says. (Flynn has a strong buy on both companies; her firm has been an underwriter for TMP.)

This isn't the first time that Internet rivals have decided they'd be better off joining forces in a weakening economy. Competing technology information site CNet Networks (CNET), for example, acquired competitor ZDNet last year, and women's site iVillage (IVIL) acquired Women.com Networks last month. But on its conference call, TMP talked down any hint of cost savings, saying Monster.com and HotJobs.com would be run as separate sites, brands and business units.

All Politics Are Local

On the Monday conference call, executives said that anywhere from one-half to two-thirds of HotJobs.com visitors each month are also visiting Monster.com. They also said that the sites have about $40 million in overlapping revenue; HotJobs had $96.5 million in revenue in 2000, while TMP, with its Monster.com property, reported $435.2 million in interactive commissions and fees for 2000.

Monster.com CEO Jeff Taylor said executives were still working on how they'd segment the two brands, but he suggested that the company could make distinctions between nationally inclusive job advertising and locally oriented sites, or it could choose to target hourly wage workers, who haven't yet been a major focus of online recruiting.

In the meantime, as was once the case with many other Internet companies, TMP is being valued more for what it could be, rather than what it is. On Monday afternoon, it was trading at 42 times estimated earnings for 2001 (using Thomson Financial/First Call's consensus of analysts) and 30.5 times estimated 2002 earnings.

But those earnings, or "diluted adjusted EPS," are sort-of earnings in the tradition of Internet-related companies; in this case, they exclude merger and integration costs. So while TMP reported 5 cents of EPS to the Securities and Exchange Commission for 2001's first quarter, Wall Street records its EPS as 18 cents.

In a June 15 note, Shipman wrote that TMP management has trained Wall Street to ignore merger and integration costs. However, he doesn't feel they should be fully excluded: "Given the number of acquisitions that TMP executes," he wrote, "the M&I costs should more likely be expensed, as they appear to be more a part of TMP's everyday operating expenses." That being said, Shipman wrote that he thought TMP's shares, then trading around $58, were undervalued. He has a price target of $73 on the stock.

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